Dissent makes rate rise more likely

The prospect of an interest rate hike before the end of the year was reopened today as it was revealed that two members of the Bank of England's monetary policy committee (MPC) voted for a 0.25% rise this month.

Minutes from the MPC's August meeting showed that Ian McCafferty and Martin Weale argued that improvements in the economy meant it was time for an increase.

It was the first split vote on rates since July 2011 and broke the consensus under governor Mark Carney in which all of the main monetary policy decisions since he took charge last summer have been unanimous.

Economists said the dissent meant the door was left open for a possible interest rate hike before the end of this year - a possibility that only a day earlier had seemed to fade as figures showed inflation dropped sharply to 1.6% in July.

Markets have pencilled in the most likely timing for a rise as next February but the pound rose a cent against the euro today as currency traders recalibrated the probability of it happening earlier. It was also up against the dollar.

The likelihood of a rise this year has appeared to ebb in recent days because of falling inflation and last week's figures showing a 0.2% fall in pay - the first decline since the height of the recession in 2009.

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At the same time the Bank of England said it would take greater account of pay when deciding when it should raise rates.

Today's minutes, from the MPC meeting of August 6 and 7, saw members vote 7-2 in favour of maintaining rates at 0.5% where they have been for more than five years, after they were slashed to try to help the economy back to health.

Prospects of an increase have risen with the improving economy. Policy-makers on the committee must weigh up the need to keep a lid on inflation without snuffing out the recovery.

The minutes said: "For two members, in particular, economic circumstances were sufficient to justify an immediate rise in Bank rate."

Mr McCafferty and Mr Weale argued that despite weak pay growth, the Bank's actions ought to anticipate its inevitable rise, adding that a rate of 0.75% would still be "extremely supportive" to the economy.

They suggested a small rise now would help the MPC stick to its aim of making only gradual hikes later.

The majority felt that "there remained insufficient evidence of inflationary pressures" to justify an increase.

Some argued that, given the concerns that weak pay growth would continue for longer, "there would be merit in waiting to see firmer evidence that solid increase in pay growth were in prospect before tightening policy".

Another reason for leaving the status quo for now was that "increases in Bank rate well ahead of any pick-up in wage and income growth risked increasing the vulnerability of highly-indebted households".

There was an acknowledgement that burgeoning growth meant the time for the rate rise was nearing as "the longer the expansion continued, the less likely it became that some of the downside risks to growth and inflation would appear".

The split was the first on the MPC on either rates or quantitative easing (QE) - which injects billions into the economy - since Mr Carney became governor last summer.

Predecessor Lord King saw a series of splits right up until his departure over QE, when he and two other members took the minority view that it should be increased by £25 billion.

The last dissent on rates occurred in July 2011 when Mr Weale and former chief economist Spencer Dale, who has now left the Bank, voted for a 0.25% hike.

Samuel Tombs of Capital Economics said the latest minutes "suggest that it would be foolish to rule out the possibility of a 2014 rate hike" though he still expected this would happen in February.

Jeremy Cook, chief economist at currency exchange company World First, said: "A marker has been put down and we only need three more members of the MPC to switch allegiance and we will have higher rates in the UK."

David Kern, chief economist at the British Chambers of Commerce, said: "It is disappointing that two members voted for an immediate increase at the last MPC meeting.

"With inflation well below target and wage growth stagnating, any increase in interest rates at the moment would be premature. The risks from raising rates too early are much greater than the risks of waiting just a little longer."

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Kathleen Brooks of Forex.com said: "The longest period of unity in the MPC's history has been shattered. Now things at the BOE will start to get interesting.

"The split suggests that the MPC is not as dovish as Mark Carney, the governor, which could mean future decisions are on a knife edge, especially if the economic data continues to improve and wages pick up."

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